Goodwill Indemnity due to the Master Franchisee and/or to subfranchisees in case of Contractual Termination by the

Master Franchisor

2012 IDI Annual Conference - Venice

CHAIRMAN:

Luciana Bassani Dannemann Siemsen Advogados, Rio de Janeiro; IDI country expert for franchising (Brazil)

PANELLISTS:

Hikmet KoyuncuogluKoyuncuoglu & Koksal Law Firm, Istanbul  

Horst BeckerAriathes Rechtsanwälte, Munich  

• Specific franchise regulation dealing with goodwill indemnity by the end of the master franchise or subfranchise agreements?

MAIN ASPECTS TO BE VERIFIED

• Similar legal provisions for agency agreements or distribution agreements that could be applicable by analogy to compensate the goodwill?

ANALOGY

• Legal basis- not goodwill- compensation for loss of benefits deriving

from a clientele created by franchisee/ master franchisee

• Application of art. 89 b German Commercial Code (GCC) by analogy

INDEMNITY IN GERMANY

• Provisions of art. 89 b GCC

• Analogous application to other distribution intermediaries, exclusive dealers in particular

• Analogous application to franchisees and master franchisees

INDEMNITY IN GERMANY

• Loss of income because of loss of clientele

• Continuing advantages from the clientele for the principal

• Provision strongly based on equity reflections

HISTORY AND PHILOSOPHY OF ART. 89 B GCC

• Benefits for the principal deriving from the clientele brought by the agent

• Loss of commissions for the agent

• Elements of equity

CONDITIONS

• Hypothetical analysis of the commissions, the agent would have earned with the clientele

• Upper limit: one year‘s commission

CALCULATION

• Termination by agent without good cause

• Termination by principal for cause

EXCLUSION OF INDEMNITY

• Art. 89 b GCC may not be excluded before the end of the contract

• International mandatory

• Circumvention by choice of law and/or choice of jurisdiction prevented

MANDATORY CHARACTER

• Decision of German Supreme Court of 3 May 1983

• Integration in principal‘s sales organisation

• Transfer of clientele to principal

ANALOGOUS APPLICATION TO AUTHORISED DEALERS

• Integration in sales organisation is not a problem

• Crucial requirement: transfer of clientele to franchisor

• No certainty concerning the basis of calculation

ANALOGOUS APPLICATION TO FRANCHISEES

AND MASTER FRANCHISEES

• Not regulated under current Commercial Code

• Supreme Court Decisions only for Agencies

• No definition of a Franchise Contract in the legislation but Supreme Court Decisions

INDEMNITY UNDER TURKISH LAW

• Not regulated under current Commercial Code

• Supreme Court Decisions only for Agencies

• No definition of a Franchise Contract in the legislation but Supreme Court Decisions

INDEMNITY UNDER TURKISH LAW

• Is it common for Courts to rule in favor of master franchisees or subfranchisees upon expiration or termination of their respective agreements in order to specifically grant them compensation for goodwill?

CASE LAW

• The most valuable intangible asset – the trademarks – for attracting clientele, normally belongs to franchisors. Which aspects or circumstances do the Courts normally verify to grant such compensation?

CASE LAW

• Not regulated under current Commercial Code

• Supreme Court Decisions only for Agencies

• No definition of a Franchise Contract in the legislation but Supreme Court Decisions

INDEMNITY UNDER TURKISH LAW

• Art. 124 of the new Commercial Code to be entered into force as of 01.07.2012

• Regulated for agencies – analogous application to distributors

• Characteristics of the franchise contract shall be analysed under such content

INDEMNITY UNDER TURKISH LAW

i. the terms of the master franchisee agreement;

ii. if the franchisor is the owner of a well-known trademark;

iii. if the case involves a service franchise or a product franchise system;

ASPECTS POSSIBLY CONSIDERED TO GRANT COMPENSATION

iv. if the franchise chain was started and developed in your country due to the particular effort of a master franchisee;

v. if the agreement stipulates that the goodwill solely belongs to the franchisor, is it likely that the Courts would rule otherwise, granting such compensation? (pacta sunt servanda X unfair enrichment)

ASPECTS POSSIBLY CONSIDERED TO GRANT COMPENSATION

vi. exclusivity and post-termination non-competition covenants could also be taken into consideration for such rulings?

vii. criteria, if any, applied by the Courts to determine the percentage of goodwill that rests to each contractual party?  Comparison made between master franchisees and subfranchisees of similar areas?

ASPECTS POSSIBLY CONSIDERED TO GRANT COMPENSATION

a) the term of the master franchise agreement has simply expired or the franchisor is refusing to renew;

b) termination due to master franchisor’s breach;

c) termination due to franchisor’s breach;

THE BEHAVIOR OF THE PARTIES

d) insolvency of the master franchisor;

e) the amount of effort expended by the master franchisor;

f) customer referrals by the master franchisor to the franchisor.

THE BEHAVIOR OF THE PARTIES

THANK YOU VERY MUCH!

Hikmet Koyuncuoglu

hikmet@koyuncuoglu.av.tr

Horst Becker

Becker@ariathes.eu

Luciana Bassani

lbassani@dannemann.com.br